Recent Entries

Is a Debtor’s Ability to Strip Off Second Mortgages Expanding?

Published on March 30, 2012 in Chapter 13, Chapter 7 and Real Estate. 0 Comments

Recent holdings in the Southern Bankruptcy District of Florida[1] and elsewhere demonstrate that debtors are seeking to expand their ability to strip off junior liens on real property in a Chapter 13 reorganization after having received a prior Chapter 7 discharge, and the Courts are beginning to step out of the way.

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005, most courts have ruled that debtors in so-called “Chapter 20″ cases (in which a debtor who has received a discharge in a Chapter 7 bankruptcy files a subsequent Chapter 13 petition for relief within the ensuing 4 years) cannot strip off a wholly undersecured junior lien on real property. BAPCPA was enacted in part to reform the eligibility for personal bankruptcy and prevent abuse of the bankruptcy process.

“Lien stripping” is a process authorized by the Bankruptcy Code that permits a debtor to extinguish a junior lien on real property when the equity in the property is less than the amount of the first mortgage. In brief, because there is no equity to secure the junior lien, the Code permits the Court to extinguish the lien upon the debtor receiving a discharge through the bankruptcy process, leaving the junior lien holder with only an unsecured claim. Thus, the second mortgage holder must aggressively defend an attempted lien strip, or it risks a near complete loss.

“Chapter 20″ is a term for a debtor who has already availed himself of relief under Chapter 7, which allows him to liquidate his assets to satisfy his debts to the greatest extent possible, upon which he receives a discharge canceling his personal liability for his debts. The debtor then files another bankruptcy petition under Chapter 13, which allows him to reorganize and repay his remaining debts through a 3- or 5-year plan. However, under the revisions enacted in BAPCPA, if the debtor files a Chapter 13 within four years of receiving a Chapter 7 discharge, he/she is not eligible for another discharge.

Courts have not allowed Chapter 20 debtors to strip off junior liens because such a debtor is ineligible for a discharge in the Chapter 13 case. Previously, Florida Bankruptcy Courts have held that the plan confirmation requirements of the Bankruptcy Code do not allow confirmation of any plan that does not provide for secured claimants to retain their lien until the debtor receives a discharge. This requirement was applied to attempts to strip off junior liens in Chapter 20 cases because if a secured claimant must retain its lien through discharge, and the debtor was ineligible, then the secured claimant cannot be stripped and must retain its lien and survive the completion of the Chapter 13 plan.

However, recent decisions in several other circuits outside of Florida cast doubt on this precedent. These decisions hold that there is no specific requirement in the Bankruptcy Code conditioning the right to lien strip on the debtor’s eligibility for discharge. Additionally, as argued in In re Vigo in the Southern District of Florida, where a debtor’s personal liability on an undersecured junior mortgage has been discharged in a Chapter 7, eligibility for discharge in the subsequent Chapter 13 would place a redundant and unnecessary requirement on the debtor’s ability to lien strip.

Although the Courts appear more willing to entertain these novel arguments for lien stripping in Chapter 20 cases, In re Vigo is the first case in the Southern District of Florida that we are aware of where the Court has allowed such a lien strip. It is not clear whether the granting of such a motion was due to the absence of opposition from the secured creditor, or because the Court agreed with the novel argument presented, but it remains as important as ever that junior lien holders continue to assert their rights and oppose such attempts. Recent prior cases in the Southern District of Florida have held the opposite of Vigo, that ineligibility for discharge is a threshold consideration that precludes avoidance of wholly unsecured junior liens. Under this and other similar decisions, the wholly unsecured junior lien holder retains its lien until the debtor pays off the underlying debt pursuant to nonbankruptcy law, a much better result for the secured creditor.

Secured creditors’ rights are being threatened by this expansion of a debtor’s rights. The economic realities of underwater properties and wholly unsecured junior mortgages and equity lines are being exacerbated by unopposed efforts of debtors’ attorneys making novel arguments to extinguish secured debt. The vigilant secured creditor can stem this debtors’ rights boom by relying on precedent and challenging the Chapter 20 debtor’s lien stripping efforts.

If you would like more information on Chapter 20 bankruptcies, the lien-stripping process and your rights as a secured creditor under the Bankruptcy Code, please contact Mr. Mark E. Steiner, Esq. Mark is an associate who practices in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA located in the Ft. Lauderdale, FL office. He can be reached at 954.740.5276 and .

[1] In re Vigo, Case No. 11-32092-EPK (Bankr. S.D.Fla. January 18, 2012)

When Spouses Cannot Strip Mortgage Liens in Bankruptcy

Published on April 13, 2011 in Chapter 13, Chapter 7 and Real Estate. 0 Comments

In a previous advisory, titled “Lien Stripping Prohibited if Debtor is Ineligible for Discharge”, the discussion centered on emerging case law that prohibits a debtor from stripping liens on wholly unsecured mortgage claims when that debtor is ineligible for a Chapter 13 discharge.  A recent case out of the Northern District of Illinois Bankruptcy Court adds another barrier to stripping wholly unsecured liens – when property is held in a tenancy by the entirety, and only one spouse seeks to strip the lien.[1]

In this case, both the husband and the wife filed a Chapter 13 bankruptcy, but the husband was ineligible for a Chapter 13 discharge because he received a Chapter 7 discharge within four years of filing the case. The wife, however, was eligible for a discharge, and so could conceivably strip the lien.  The plan proposed to strip the second mortgage as wholly unsecured, and an adversary proceeding was filed to determine the secured status of the mortgage lien.  If the husband could not strip the lien, the question became:  could the wife do it for both, or only as to her interest?  The creditor argued that she could not do either, and the court agreed.

Most states recognize tenancy by the entirety as a form of property ownership. Each state may vary its characteristics. But the fundamental aspect remains the same – only married couples may hold property in a tenancy by the entirety.  This is an ancient form of property ownership which, while it recognizes two individuals as owners of a property, it also recognizes only one tenant of the property, that is, the marriage.  In other words, neither spouse has an individual slice of the property. Both together own it all.

Spouses may only affect the property by acting together, but individually they cannot.  For example, neither can mortgage the property without the other’s consent, but together they both can.  Conversely, a creditor cannot hold a lien on only one spouse’s interest, only on the whole of the marital entity’s interest, the whole property. 

Using this reasoning, the judge held that when property is held as a tenancy by the entirety, a lien strip may occur only when both spouses are acting as one. In this case both spouses signed the note and granted a second mortgage on their residence. But, because only one spouse could conceivably strip the lien due to the other’s ineligibility for discharge, neither spouse could do it.

When only one spouse seeks to strip a lien, determine whether the property is held in a tenancy by the entirety. If only one spouse seeks to strip a lien, research whether the property is held in a tenancy by the entireties.  If both spouses seek to strip a lien, verify that neither is ineligible for a discharge.  Consult with your local bankruptcy counsel to review the state law as to tenancy by the entirety and advise you how to proceed.

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached at 312.253.9614 or .

[1]Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)

Lien Stripping Prohibited If Debtor Is Ineligible For Discharge

Published on April 7, 2011 in 2005 BAPCPA, Chapter 13 and Chapter 7. 1 Comment

Chapter 13 debtors who are ineligible for a discharge may not strip mortgage liens, even if the liens are wholly unsecured. This is a growing consensus among a majority of bankruptcy courts, and is a result of the interplay between two Bankruptcy Code provisions enacted in the 2005 BAPCPA amendments.

The first provision is that a debtor is not eligible for a discharge in Chapter 13 if the case is filed less than four years after obtaining a discharge in a Chapter 7, 11 or 12,[1] or less than two years after a discharge in a Chapter 13.[2]  Previously, there were no grounds to deny discharge in Chapter 13 if a debtor was a frequent filer, or more to the point here, filed a “Chapter 20.”  A “Chapter 20” is obtaining a Chapter 7 discharge as to all unsecured debt, and then filing a Chapter 13 to cure defaults on secured debt to avoid repossessions and foreclosures.

The second provision is that a secured creditor has the right to retain its lien on an “allowed secured claim” until the earlier of 1) payment in full of the balance under non-bankruptcy law, or 2) a Chapter 13 discharge.[3]  This was enacted to end common plan provisions that required release of a lien before a Chapter 13 discharge or payment of any unsecured portion once the secured portion of a claim was paid.  If the case was later converted or dismissed, the creditor had lost its lien.

Combined, these two provisions work to prohibit lien stripping when a debtor is ineligible for a Chapter 13 discharge. If a lien must remain until the earlier of discharge or payment in full of the non-bankruptcy balance, then the earlier event will be full payment because no discharge will be entered.  This operates to prohibit lien stripping when the debtor is ineligible for a discharge– the lien must remain until the underlying claim is paid in full, even if it is wholly unsecured. 

Debtors have claimed that they can avoid the lien retention statute if a mortgage is wholly unsecured by arguing a wholly unsecured mortgage lien is an unsecured claim in actuality and the statute only applies to “allowed secured claims”.  Likewise, by calling such a claim unsecured because of the absence of any equity, they have also argued that the lien is void by operation of law under 11 U.S.C. § 506(d), which states:  “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”  (Emphasis added.)  Neither one of these arguments has been successful. 

A recent case decided in the Northern District of Illinois,[4] rebuffed this reasoning using established case law and explained what an “allowed secured claim” is.  Claim “allowance” is the process of putting a claim in line for payment. A claim is allowed unless it is objected to.[5]  Claims may only be disallowed on specific grounds enumerated in the Bankruptcy Code.[6]  A secured claim may not be disallowed simply because there is no equity in the collateral.  Hence, when any secured claim is filed, it is “allowed”.

A claim is a “secured claim” if a creditor has recourse to collateral, most commonly in the form of a lien.[7]  The value of the lien is a separate issue,[8] and does not determine whether the claim is “secured” or not. If a claim has an underlying lien, it is a “secured claim”.  

A wholly unsecured mortgage claim is an “allowed secured claim” because it is allowed and because it has recourse to real estate by the lien.  Thus, debtors may not declare such a claim “void” under 506(d) or skirt the lien retention requirement by claiming an unsecured mortgage lien is not an “allowed secured claim”.

This is a powerful tool when a debtor is not eligible for a discharge.  It will prevent the stripping and discharge of wholly unsecured liens.  Only the Ninth Circuit has case law that allows lien stripping when a debtor is not eligible for a Chapter 13 discharge.[9]  If a debtor files a Chapter 13 and seeks to strip a lien within four years of obtaining a Chapter 7 discharge or within two years of obtaining a Chapter 13 discharge, creditors should consult with their bankruptcy counsel to determine whether to object to the proposed lien strip.  

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312.253.9614 or via email at .
__________

[1] 11 U.S.C. § 1328(f)(1).
[2] 11 U.S.C. § 1328(f)(2).
[3] 11 U.S.C. § 1325(a)(5)(B)(i).
[4] In re Fenn, 428 B.R. 494 (Bankr. N.D. Ill. 2010)
[5] 11 U.S.C. § 502(a)
[6] 11 U.S.C. § 502(b)
[7] Dewsnup v. Timm, 502 U.S. 410, 417 (1992)
[8] 11 U.S.C. § 506(a)
[9] In re Tran, 431 B.R. 230, 235 (Bankr. N.D. Cal. 2010)

New Plan Provision Allows Lien Stripping Without An Adversary Proceeding

Published on September 14, 2010 in Bankruptcy Filings. 0 Comments

Stripping unsecured liens without an adversary proceeding is now easier for debtors in the Northern District of Illinois (Chicago).  The new Model Plan adds a section specifically for lien stripping.  Debtors will be required to use this new plan commencing October 15, 2010, but the plan is available online now, and debtor’s attorneys can start using it immediately. 

Previously, if a plan sought to strip a lien, language to that effect was inserted in the Special Terms section at the end of the plan.  A creditor must be aware of this new section so as not to miss a debtor’s intention to strip its lien.

The new Model Plan adds Sec. E. 3.2, titled Other secured claims treated as unsecured, and is as follows:

The following claims are secured by collateral that either has no value or that is fully encumbered by liens with higher priority. No payment will be made on these claims on account of their secured status, but to the extent that the claims are allowed, they will be paid as unsecured claims, pursuant to Paragraphs 6 and 8 of this section.
(a) Creditor: _________________Collateral:_________________________

This section permits a debtor to declare a lien unsecured and then pay it as an unsecured claim along with other unsecured creditors.  Coupled with Sec. B. 3, which provides that a creditor must release its lien upon discharge (or earlier if the debtor pays off the debt in full), this permits lien stripping without an adversary proceeding.  Liens would be stripped at discharge.

To further trip up lien holders, the plan also provides in Sec. E. 8. that:

Any claim for which the proof of claim asserts secured status, but which is not identified as secured in Paragraphs 2, 3.1, or 3.2 of this section, will be treated under this paragraph to the extent that the claim is allowed without priority.

This means that if a creditor files a secured claim, and it is not listed in these sections, it will be paid as an unsecured claim by operation of the plan.

Some of the judges in the Northern District of Illinois will still require an adversary proceeding to strip liens even if debtors fill out this section.  I’ve talked to the chair of the court’s liaison committee, and this will be on the agenda at the next meeting.  Hopefully, the inquiry will help identify which of our eleven judges will accept the plan provision in lieu of an adversary proceeding.

So, lien holders must now check in three places within the plan to determine the treatment of their claim.  First, look to see if your claim is identified as secured in Sec. E. 2, 3.1, or 3.2.  If it is not listed at all, it will be treated as unsecured.  If it is listed in Sec. E. 3.2, it will be treated as unsecured. Finally, check in the Special Provisions Section at the end of the plan.  If a judge still requires an adversary proceeding, the intention to file an adversary to strip the lien and pay the claim as unsecured may be listed there.

If you have any questions on this matter, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312-253-9614 or via email at .